By Porter Stansberry with Braden Copeland
Who is the world's most influential investor?
Most people would say Warren Buffett. He is a living legend – probably the most successful investor in history. He is the CEO, chairman, and largest shareholder of Berkshire Hathaway, which controls more than $60 billion of publicly traded stocks and holds total assets of around $370 billion.Who is the world's most influential investor?
Most people would say Warren Buffett. He is a living legend – probably the most successful investor in history. He is the CEO, chairman, and largest shareholder of Berkshire Hathaway, which controls more than $60 billion of publicly traded stocks and holds total assets of around $370 billion.
Most people would say Warren Buffett. He is a living legend – probably the most successful investor in history. He is the CEO, chairman, and largest shareholder of Berkshire Hathaway, which controls more than $60 billion of publicly traded stocks and holds total assets of around $370 billion.Who is the world's most influential investor?
Most people would say Warren Buffett. He is a living legend – probably the most successful investor in history. He is the CEO, chairman, and largest shareholder of Berkshire Hathaway, which controls more than $60 billion of publicly traded stocks and holds total assets of around $370 billion.
Buffett is famously bullish on America. In his most recent letter to shareholders, he says:
Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born.
The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.
We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932, and 1941, America's best days lie ahead.
Throughout my lifetime, politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born.
The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential – a system that has worked wonders for over two centuries despite frequent interruptions for recessions and even a Civil War – remains alive and effective.
We are not natively smarter than we were when our country was founded nor do we work harder. But look around you and see a world beyond the dreams of any colonial citizen. Now, as in 1776, 1861, 1932, and 1941, America's best days lie ahead.
We have no doubt America's best days lie ahead of us. We are confident 20 years from now, America's economy (and the technology that enables its growth) will be virtually unrecognizable to an investor from 2011.
Over the long term, our standard of living will undoubtedly improve.
We part ways with Buffett only on one point: We don't believe the "American system" remains alive and effective. In almost every critical way, the system of incentives, responsibilities, and freedoms that powered America's ascendancy have been corrupted, regulated, or simply destroyed.
The American Revolution delivered to the world a huge nation, virtually free from the burdens and tyranny of government, with a sound currency, little debt, and a population dedicated to avoiding foreign wars. These principles translated into huge financial advantages, making us the wealthiest nation in the world by about 1850. We stuck to these principles, with a few notable exceptions, until about 40 years ago.
No doubt, in its historic form, the "American system" works. But does it still exist?
Buffett was born on August 30, 1930. In that year, the federal government's total budget was less than 3% of GDP. Today, total government spending exceeds 40% of GDP. America no longer has any significant advantages in regards to the size of our government. We have at least as big of a domestic government burden as any other major economy. And thanks to our military spending, a much bigger burden in total.
Our military now stations troops permanently in more than 150 countries. Almost 400,000 of our 1.5 million active-duty personnel are serving outside the United States. Our founding fathers feared having any standing army. Today, we keep a standing army in harm's way – spending as much on our military as the rest of the world combined. Whether you agree with these decisions or not, there's no arguing the point that this kind of foreign policy is radically different than America's historic position.
Finally… the most important change to the "American System" came when Nixon took us off the gold standard in 1971.
Over the long term, our standard of living will undoubtedly improve.
We part ways with Buffett only on one point: We don't believe the "American system" remains alive and effective. In almost every critical way, the system of incentives, responsibilities, and freedoms that powered America's ascendancy have been corrupted, regulated, or simply destroyed.
The American Revolution delivered to the world a huge nation, virtually free from the burdens and tyranny of government, with a sound currency, little debt, and a population dedicated to avoiding foreign wars. These principles translated into huge financial advantages, making us the wealthiest nation in the world by about 1850. We stuck to these principles, with a few notable exceptions, until about 40 years ago.
No doubt, in its historic form, the "American system" works. But does it still exist?
Buffett was born on August 30, 1930. In that year, the federal government's total budget was less than 3% of GDP. Today, total government spending exceeds 40% of GDP. America no longer has any significant advantages in regards to the size of our government. We have at least as big of a domestic government burden as any other major economy. And thanks to our military spending, a much bigger burden in total.
Our military now stations troops permanently in more than 150 countries. Almost 400,000 of our 1.5 million active-duty personnel are serving outside the United States. Our founding fathers feared having any standing army. Today, we keep a standing army in harm's way – spending as much on our military as the rest of the world combined. Whether you agree with these decisions or not, there's no arguing the point that this kind of foreign policy is radically different than America's historic position.
Finally… the most important change to the "American System" came when Nixon took us off the gold standard in 1971.
The banking system of the United States was backed by gold for more than 200 years. During certain emergencies – like the Civil War and the Great Depression – gold backing was suspended. But eventually… the dollar was always returned to its foundation in gold.
Gold has always been a key part of the "American system." It assured creditors their debts would be repaid in currency that was literally as "good as gold." Besides serving as a yardstick for creditors and debtors, gold reserves have also limited the amount of credit available in our economy. This is its real function – something most observers (including Warren Buffett) don't fully grasp.
Basing our money on gold limited the amount of new credit banks could create to the size of its reserves. And this limited the amount of money that could be created inside the system, holding inflation in check. The gold standard prevented massive credit bubbles from forming because credit creation was linked to the size of the economy via gold reserves. Growth in reserves could only be achieved by increases in production or through trade.
The gold standard's powers shouldn't be exaggerated. A gold-backed monetary system doesn't prevent bankers from making bad loans. It won't stop investors from paying too much for lousy investments. And it doesn't work to prevent bubbles when debts outside the banking system are created without limit, as occurred with the various trust companies prior to the Great Depression. The gold standard only works to the extent that it's enforced, just like any other standard.
Historically, it was used wisely. That's why the ratio of debt (both public and private) to GDP had been remarkably stable at around 1.6 times GDP though most of U.S. history. The size of our gold reserves limited our debt burdens. And reserves could only grow in correlation with the overall economy. Bankers couldn't build up onerous amounts of debt.
That all changed in August 1971. Rather than cut the government's spending and raise interest rates to slow demands from our trading partners for bullion, President Nixon took us off the gold standard. From that point, our creditors had no legal claim to our gold reserves. And the banking system had nothing but the Federal Reserve to limit the creation of additional credit and money.
You can see what happened next in the chart below…
Gold has always been a key part of the "American system." It assured creditors their debts would be repaid in currency that was literally as "good as gold." Besides serving as a yardstick for creditors and debtors, gold reserves have also limited the amount of credit available in our economy. This is its real function – something most observers (including Warren Buffett) don't fully grasp.
Basing our money on gold limited the amount of new credit banks could create to the size of its reserves. And this limited the amount of money that could be created inside the system, holding inflation in check. The gold standard prevented massive credit bubbles from forming because credit creation was linked to the size of the economy via gold reserves. Growth in reserves could only be achieved by increases in production or through trade.
The gold standard's powers shouldn't be exaggerated. A gold-backed monetary system doesn't prevent bankers from making bad loans. It won't stop investors from paying too much for lousy investments. And it doesn't work to prevent bubbles when debts outside the banking system are created without limit, as occurred with the various trust companies prior to the Great Depression. The gold standard only works to the extent that it's enforced, just like any other standard.
Historically, it was used wisely. That's why the ratio of debt (both public and private) to GDP had been remarkably stable at around 1.6 times GDP though most of U.S. history. The size of our gold reserves limited our debt burdens. And reserves could only grow in correlation with the overall economy. Bankers couldn't build up onerous amounts of debt.
That all changed in August 1971. Rather than cut the government's spending and raise interest rates to slow demands from our trading partners for bullion, President Nixon took us off the gold standard. From that point, our creditors had no legal claim to our gold reserves. And the banking system had nothing but the Federal Reserve to limit the creation of additional credit and money.
You can see what happened next in the chart below…
At Jim Grant's recent conference in London, David Stockman, director of the White House Office of Management and Budget under Ronald Reagan, explained why credit exploded:
American lawmakers have been freed of the classical monetary constraints. There is no monetary squeeze, and there is no reserve asset drain. The Fed always supplies enough reserves to the banking system to fund any and all private credit demand at rates which are invariably low.
By 1990, the total debt-to-GDP ratio in the U.S. had grown substantially to 2.6 times GDP. It reached 3.6 times by 2007 – even before the financial crisis. Today, total debt in the United States stands at $56 trillion – 3.8 times GDP.
That's $180,000 in debt for every man, woman, and child in the United States. That's nearly $700,000 in debt per family in the United States. The interest on these debts is more than $3.5 trillion per year. To give you some idea how much money we're spending on interest alone… just consider the total budget of the U.S. federal government is also $3.5 trillion. Again, $3.5 trillion just covers the interest!
These debts are completely unaffordable. How many families in America do you know that can afford to finance and repay $700,000 in debt? Not many… Certainly not the "average" family.
This debt crisis leaves us in a difficult position. Should we default on our debts (many of which are owned by foreign investors) and risk a collapse of our economy? Or should we simply print more money to pay for these debts, and risk a massive inflation?
So far it seems clear our political leaders are choosing inflation. That's why the Federal Reserve is printing trillions of dollars – aka "quantitative easing." It's buying around 70% of all new debt issued by the U.S. Treasury. This is greatly expanding our monetary base, in hopes the resulting inflation will make it easier to repay our debts.
In our view, this is complete madness. What's the point of paying our debts if the resulting inflation impoverishes the entire country? That's clearly what's happening.
America is in the early stages of a massive debt crisis and currency collapse.
We created this economic tragedy over the last 40 years by abandoning the "American system" Buffett references. We have abandoned, willingly, our core economic advantages. Our leaders, including Buffett, convinced us these things didn't really matter… and we could succeed without them.
They will be proven wrong.
You can see for yourself what's going to happen. The dollar is crashing. Against other major currencies, it has lost 35% of its value in the last 10 years. Against a standardized basket of commodities, it is down more than 50%. To bail out our banks and profligate housing speculators, we are burning the family furniture. As the currency crumbles, the value of every asset in America declines. As the currency crumbles, so does our standard of living. And we are increasingly at the mercy of our foreign creditors.
And for what? We've gone three generations into debt for mortgages on houses we don't need. We spent almost $100 billion to save a car company whose products no one wants. We spent perhaps hundreds of billions of dollars to bail out a handful of Wall Street firms – the same companies whose financial products got us into so much debt in the first place. Then in our spare time, we became the proud overlords of Iraq and Afghanistan, where $1 trillion and thousands of destroyed lives gets you… nothing.
Inflation will soar. The bond market will get wiped out. Our standard of living will plummet. Just imagine what the historians will write about the "American Empire" in 100 years.
Ten years ago, America sat on a pinnacle of power almost unimaginable even 50 years ago. We controlled the world's reserve currency. And it was just paper. We had no military rival. We invented the computer and built the Internet. Our military, our corporate brands, and our banks dominated the world economy like no other empire in history…
And then we went broke.
How could that have happened? It is as if our success and power convinced us we could break the laws of economics with complete impunity – while breaking all history's blood rules, too.
Down payments? Who needs those? Everyone deserves a home. Home prices never fall. Besides, we'll just get AIG to insure those bonds. What could go wrong?
Afghanistan? The Graveyard of Empires? We can handle it.
What about a civil war-prone country (Iraq) with Stone Age infrastructure, three rival indigenous tribes, and a unifying, religious-based hatred of Americans? Why not? Let's invade. We'll get the British to help. They had such success last time…
And why bother managing all these government employees? Let's let them set their own wages and benefits. What could go wrong?
Health care? Of course we can afford it. Let's toss in Viagra and other prescription drugs, too. That'll get us some votes.
Taxes? Nobody wants those. We'll cut 'em. How will we pay for all this? The rich will pay. Oh… that doesn't work? Well, we'll just keep borrowing from the Chinese. Have you seen what interest rates they'll accept? What a bunch of fools… Besides, everyone knows deficits don't matter.
And so it went… for nearly 10 years.
You couldn't have written a piece of fiction with a more absurd twist. It doesn't make any sense. But that's exactly what's happened. Like Charlie Sheen on a bender, we've jumped head first into more bad ideas over the last decade than perhaps any other country in modern times. And now we've come to the logical conclusion… The day of financial reckoning is here for the global paper currency system.
The solution is simple for anyone interested in preserving their wealth through all this: Own the money that mattered in the original "American System." Own gold.
Good investing,
Porter Stansberry
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